Review – The New Global Investors & Working Capital Contrasted

Monks, Robert A. G., The New Global Investors: How Shareowners Can Unlock Sustainable Prosperity Worldwide, Capstone Publishing, 2001.

Like many, Robert Monks recognizes that corporations have become the most dominant institution of our time. While they appear to be the most effective tool for creating wealth ever created, they also exact a growing cost…primarily the corruption of government and externalization of risks and responsibility with growing social and environmental damage.

Monks weaves an effective tale but his perspective is that of an aristocratic shareholder activist, not a street demonstrator against the World Trade Organization. For example, he sees the biblical Parable of the Talents as a lesson in active investment. In the parable, those with more money (talents) invested and doubled their money, while the poorest amongst them buried it, stagnated and caught God’s wrath. I always viewed the Parable of the Talents as a Darwinian justification as to why the rich get richer and the poor deserve what they get.

Monks discusses early innovations of the East India Company, such as power sharing between investors and the leaders of government (often the same people) and the growing recognition of the need for long-term commitments, instead of voyage by voyage investments. Yes, this was an important innovation but the relationship of the Company with the government might also be seen as one of the earliest military-industrial complexes, with its corrupting influences.

When discussing Bill Gates’ rise through the “fruits of his own genius” and “some help from outside investors,” his praise appears unqualified. There is no mention of criminal activity or anticompetitive practices. Again, when Monks discusses the classic Berle Means dilemma of the separation of ownership and control, he sees it as the death of corporate social responsibility. Maybe so, but the social responsibility of Carnegie and Rockefeller certainly was very paternalistic…not based on balanced power and too often came at the end of their careers.

I have my differences with Monks’ perspective but our basic concerns are similar and our musings regarding solutions at least point in the same general direction. Fundamentally, Robert A. G. Monks is worried that corporations aren’t being socially responsible. He quotes a Harris poll conducted in late summer of 2000, which found that only 4% of Americans thought corporations should have only one purpose – to make the most profit for the stockholders, while 95% agreed that corporations owe something to their workers and communities (1% weren’t sure or didn’t answer).

Monks appears to believe, and I agree, that corporate control has been largely hijacked by CEOs for their own selfish interests. “Corporations are truly getting to the same place as Church and nation state before them, where the position of the leader rather than the institution becomes paramount. This is the condition that precedes loss of legitimacy and collapse.” At bottom, we’re both not so much concerned with the corporation as an institution but with the people who are impacted by it. Monks sees the rise in CEO pay to 475 times what their workers earn, as well as their political arrogance and their path of environmental degradation, as analogous to Marie Antoinette’s “Let them eat cake.”

David Korten presents an interesting analogy in his recent book, The Post-Corporate World. Just as King Midas destroyed and himself and those he loved when everything he touched turned to gold, the modern corporation has the potential to destroy everything in its path by turning nature and human relationships into money.

Change can come from outside the corporation in the form of laws or the marketplace or it can also come from inside the corporate structure itself, through the CEOs or shareholders. In previous books, Monks has rejected the need for new laws. “No new laws need be passed, no new regulations promulgated, no new agencies formed,” he says on page 184. However, by the next page he concludes that “amendments or possibly new regulations may prove necessary.”

My guess is that as a Republican, he’d love to see our problems solved by the marketplace, without government intervention. He founded Institutional Shareholders Services (ISS), a service which tells institutional investors how to vote in corporate elections to increase shareholder value. He founded LENS, a corporate governance turnaround fund, which has successfully outperformed the S&P 500 since its inception. Monks has certainly done more than most to use the market to move corporations toward more responsible governance to their shareholders.

As both a Democrat and public employee, my primary reservation against depending on government to solve our problems is that it is too often indistinguishable from the interests of corporate CEOs. Corporate contributions appear to determine who gets elected and corporate lobbyists largely determine what laws they write. That concern also appears to be shared by Monks.

We’re both pinning our hopes on pension funds. They’ve got the money, holding almost a third of US and a growing portion of global equity markets. With a base in millions of employees, their long-term perspective and universal ownership (owning a chunk of virtually all public companies) make them the vehicle of choice. Pension funds can set the standards for corporate governance around the world. The flow of money, much of it from pension funds, “creates the future of society”…”determining which regions will prosper, what technologies will be advanced, which jobs will be created, and what educational requirements will be set.” (p. 81)

“Why substitute a new institution – pension funds – for an existing one – large corporations? The answer is simple: pension funds have more of a stake in the good of society and the world.” “If pension funds can be liberated from the dead hand of tolerated trust abuse, this significant ownership element can function as the independent force that can call management to account.” (p. 181)

Pensions have more of a base in the average worker than other funds. They have more flexible rules governing their investments than other funds and they also have a longer timeline. They’re not dependent on getting a bump in the next quarter. Instead, they can look to the next ten or twenty years. With that long-term perspective, they should be more likely to favor sustainable environmental practices, community involvement, and employee participation.

We’ve identified the tool, but now the problem is putting it to use. Pension law, ERISA, requires funds to be administered solely in the interests of the participants and beneficiaries. That standard applies to all duties charged to a fiduciary, including the voting of proxies. However, as Monks points out, “there is the problem of proof. How can it be proven that the vote, or failure to vote, of a single shareholder caused a specific amount of damage.” Certainly corporate pension funds don’t want to develop an activist stance; voting against management at other corporations is likely to lead to retaliation.

One part of his solution would be a revision in the law, which would presume the following:

If a corporation has underperformed drastically for a substantial period of time, it can be presumed that the fiduciary shareholders have failed to take appropriate action to safeguard the interests of their beneficiaries.” (p. 130)

Monks provides support for his position that active investors help unleash wealth enhancing. A few of his citations include:

  • McKinsey Study showed investors are willing to pay up to 27% more for companies with good governance.
  • LENS, Hermes, and ABF Euro V.A. funds have all performed better than the standard indexes.

Investing based on corporate governance practices is likely to get a boost with the recent announcement by ISS that they will soon release their “corporate governance quotient” (CGQ). This will give clients one number, ranging from 0 to 100, which will reflect ISS’ judgement as to where a company’s corporate governance practices rank. Better performers will not only be more open to shareholder influence, as a reflection of their standing in the ratings, but will also be viewed favorably for additional investments, thus lowering their cost of capital.

Monks is nothing but prolific in citing good ideas.

  • He points to the need to reform Generally Accepted Accounting Principles (GAAP), since “the absence of a convention for valuing ‘intellectual property’ has doomed GAAP to obsolescence.” Although he doesn’t mention Margaret Blair’s work in this area which shows that such intangibles often make up about 75% of a firm’s value, he does cite Baruch Lev’s “Knowledge Capital Scoreboard,” which attempts to rank companies by their return on investments in research and development.
  • Paul Hawken and W. McDonough’s “Seven Steps to Doing Good Business,” which include eliminating waste, restoring accountability, reflect cost in prices, promote diversity, make conservation profitable, trade based on sustainability, minimal interference by businesses and unions in government.
  • Coalition for Environmentally Responsible Economies (CERES) Global Reporting Initiative (GRI) to design globally applicable guidelines for enterprise-level sustainability reports based on environmental, social and economic factors…the triple bottom line.
  • Innovest’s survey that found the top half of firms ranked by environmental sensitivity outperformed the bottom half by up to 21.8% over a two year period, depending on industry. Their Eco-enhanced S&P 500 has outperformed the actual index by 11% over the same period.
  • Brightline, Monks’ own brand of performance simulation that he hopes will be used by pension fund trustees a prudent basis for activism, directing their focused portfolio companies to comply with the law. His simulations have shown that while “the most aggressive, externalizing and Eco-unfriendly companies gain a market advantage” in the short-term, the focus companies win 17 out of 20 simulations over a 12 year time horizon.

His idea that chronic underperformance and inaction by pension fund trustees should give cause to lawsuits by beneficiaries has merit. I’m not sure this will lead to social justice but at least it will help dislodge CEO dictators who rob from their own companies.

What tears it for me is Monks’ belief that the President of the United States “can simply state that as a matter of policy the public good and the law of the land require effective and informed shareholder involvement in the governance of corporations.” (p. 184) What would that mean coming from the President, especially the current President?

While Monks has embraced the probable need for new laws, his proposed vehicle to explore what “may prove necessary” is Congressional and Parliamentary hearings regarding shareholder rights, conflicts of interests among fiduciaries, and the role of governmental agencies in enforcing trust laws. Certainly such hearings could result in great steps forward. However, they aren’t likely to address the needs of people marching in the streets against corporate power.

A more likely vehicle, although not nearly as well written (because it is a collection of essays, rather than the more coherent package of one brilliant mind) is the book Working Capital: The Power of Labor’s Pensions by Archon Fung, Tessa Hebb and Joel rogers (ILR Press, Ithaca, New York, 2001). Working Capital is written from a worker owner perspective. Like Monks’ book it stresses sustainable economic growth and triple bottom line returns. However, it also focuses on more equitable distribution of the wealth created by corporations, their employees, and their communities.

Worker owners (largely pension fund holders) want more secure better paying jobs, affordable housing, reduced environmental degradation and a more cooperative/participatory workplace. High CEO pay lowers worker morale. One of the authors, Marleen O’Connor, goes so far as predicting that corporate governance will trump labor laws in importance. Institutional shareholders, led by public pensions are creating new norms of conduct in the boardroom. Labor-shareholder proposals receive a statistically higher percentage of favorable votes. Unions have a great incentive to make sure firms are healthy because of the firm specific investments their members make, not just in their 401(k) plans but in their “firm specific human capital.”

Working Capital is replete with examples of innovations by labor in corporate governance from binding bylaw amendments to acting by written consent without waiting for formal shareholder meetings. Unions have become the leading proponents of shareholder resolutions and they know how to organize a winning campaign in the boardroom, in the press and on the streets. Unions can provide their members with the academic research needed to justify taking “social issues” into account in fiduciary voting. For example, Executive Paywatch (the AFL-CIO’s Internet site on CEO greed) cites a 1992 Berkeley study that found that pay inequality leads to less cooperative work environments, higher turnover, and lower product quality.

Labor’s shareholder activities provide good publicity for labor by demonstrating concern for long-term value. Those reading Working Capital will learn that pension plans with representatives from labor are more likely to transmit gains from bull markets to plan beneficiaries than single employee plans. They also have enhanced security. Maybe if enough of us learn about the power of our deferred wages we’ll recognize the need to get greater control over how our money is invested and how our shares are voted. Teresa Ghilarducci’s essay, “Small Benefits, Big Pension Funds and How Governance Reforms Can Close the Gap,” discusses legislation has been introduced to require pension boards to have worker representation but who knew about it? Ideas like that need to be pushed by voters all around the country.

Reforms and revolution will take the combined efforts of those working with corporate and institutional investor elites, as well as union members and street demonstrators. The New Global Investors and Working Capital point to the enormous potential of pension funds. Both provide ideas and examples that provide realistic models for pension fund management in the the twenty-first century.

, , ,

Comments are closed.

Powered by WordPress. Designed by WooThemes